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Do Retirees Need Life Insurance?

Marvin Feldman, President and CEO of nonprofit insurance education organization, Life Happens, provided that simple, all-inclusive answer to Benzinga’s question recently as part of a wide-ranging discussion on the subject of retirees and life insurance.

It’s a Mine Field – Even in Retirement

The problem for most people, Feldman suggested, is that the road leading to retirement is a long and difficult one. Many people feel that once they have negotiated the “working years” it’s time to take a break.

“You’ve gone through a mine field,” he said adding, “with more to come.”

Then you need to take stock of all sources of income – where it comes from and what happens to it after you are no longer here.

Adding Up Financial Obligations

Ticking off a number of potential financial obligations, covering both the “owe somebody” and “love somebody” sides of his initial statement, Feldman’s list includes everything from the obvious – replacing lost income for a spouse or partner – to the less apparent – leaving a legacy to a beloved organization or institution.

In between – dependent children, including those with special needs, parents now that more people live longer, a mortgage or other major unpaid obligation.

The Revenue Stream

Start with Social Security, which often continues to the surviving spouse or dependents. The amount, however, follows a complicated set of rules, laid out by the Social Security Administration.

Other types of retirement income, including pensions, 401(k) plans, and IRAs pay out to survivors, if at all, according to contracts you sign when you retire.

Feldman said a surprising number of people choose the 100 percent maximum payout option for their pensions.

They do this, he said, because they need every dollar they can get their hands on, just to maintain their standard of living in retirement. Unfortunately, this means survivors receive nothing when the pension-holder is gone.

One tactic to deal with this eventuality is to purchase life insurance designed to replace that lost income and provide you with peace of mind, knowing you have provided for those you love.

According to Feldman, the cost of this insurance depends on a number of factors including your age, the age of your spouse or dependents, your health, and the health of your spouse to name just a few.

Market Fluctuations

For those whose retirement funds consist mainly of 401(k), IRA, or other investment vehicles, Feldman asks what if the market crashes, as it did in 2008, on the way to your retirement?

Alternatively, what if you simply don’t live long enough for the market to help you accumulate the amount you need to sustain your dependents?

A life insurance policy designed to make up the difference could be the answer.

Long Term Care Considerations

According to LongTermCare.gov, 70 percent of people 65 and older will need some form of long-term care during their lifetime. The cost? Between $75,000 and almost $84,000 per year according to the 2013 Genworth “Cost of Care” survey.

Feldman pointed to a number of options that allow policyholders to use life insurance to pay for long-term care. They include the use of combination (Life/Long Term Care) products, accelerated death benefits, life settlements, and viatical settlements which involves selling your policy to a third party.

Estate Taxes

The amount you can pass along during your life (and at your passing) federal estate tax free went up for 2014.The total now exclude-able for a couple is $10.68 million.

Understanding and taking advantage of estate tax insurance could be important, according to Feldman, especially if you have significant assets and someone to whom you wish to pass these assets along.

Adding it All Up

With so much to take into account, Feldman suggested visiting the Life Happens website, which contains a Life Insurance Needs Calculator that retirees (or soon-to-be retirees) could use to plug in all the data and determine their life insurance needs.

“This tool focuses on two variables,” Feldman said, “The amount needed at death to meet immediate obligations, and the amount of future income needed to sustain the household.”

Many people, he said, only consider the former without thinking about the latter. This could leave dependents and loved ones high and dry.

Types of Insurance

Once you know how much insurance you need, the next step is to determine what kind. Although there is no pat answer, in a very general sense, if the anticipated period is relatively short, term insurance is probably best. If you expect to be paying for insurance over a longer period, whole or universal life of a similar type product may be preferred.